Mortgage lending standards should not be relaxed further

Lending industry and realtor lobbyists argue lending standards are too tight and should be loosened up. They are wrong on both counts.

Real estate industry lobbyists appeal to lawmakers for policies the real estate industry believes will promote more transactions at higher prices. Most often this myopic lobbying causes unintended long-term detrimental impacts on the housing market.

In 2004 every realtor wish was granted: lending standards were loosened to the point of complete abandonment, and restrictions on the amount prospective buyers could borrow were also removed through teaser rates, liar loans, and negative amortization. In the short term, realtors reaped the benefits as transaction volumes escalated even as prices rose higher and higher.

Rather than being the culmination of all their dreams, the direct result of granting the wishes of realtors resulted in a massive housing bubble and painful, equity-crushing housing bust that lowered home ownership rates to 20-year lows, and caused an 80% reduction in new home construction — a condition the industry has not recovered from.

Do realtors acknowledge the failing of the policies they advocate? Of course not. Rather than learn an important lesson from this disaster, real estate lobbyists continue to pepper the press with complaints about how tight mortgage standards are today with hopes that policymakers will lower standards at the FHA and GSEs to promote more transactions by making bad loans to people who won’t repay them. In short, they learned nothing; lobbyists still promote short-term goals at the expense of long-term stability. And the worst part is they are completely wrong about mortgage standards being tight today.

As many of my readers may be aware, my mantra since 2010 has been that “We simply don’t have enough qualified home buyers in American, once you take away the cash buyers, to have a real economic recovery in housing “. While some may be tired of this refrain, there remain a number of highly respected housing “gurus” who continue to profess that it is unfairly tight lending standards, not the lack of qualified buyers that are suppressing a housing recovery. The difference is not academic.

Back in January of 2014, I wrote Bold California housing market predictions for 2014. In that post I made the following prediction, “I believe the consensus will be wrong, and sales volumes will decline, house prices may rise, but sales volumes in 2014 will be lower than 2013. The biggest demand cohort in 2013 was investors, many paying all-cash. With house prices 20% higher or more, these investors will not be nearly as active in 2014. In fact, I predict one of the big housing stories of 2014 will be just how dramatically and abruptly these investors pull back.”

Logan and I saw the same circumstances back then as we do today. The owner-occupant cohort is not yet ready to support a fully-functioning housing market, particularly at price levels near the peak of the housing bubble.

Would-be home purchasers are unable, to qualify for a mortgage due to the following factors:

• They lack adequate monthly income. A lot of the jobs created, post-recession, are low paying jobs that don’t provide adequate income to support a mortgage payment. More liberal lending standards will not correct this.

• They lack liquid assets. The down payment (even just 3% for some loans) and closing cost for a home purchase exceeds many American’s available liquid assets.

• There is no financial bubble. The formal definition of a financial bubble is an economic cycle characterized by a surge in asset prices above the fundamental value of the asset. The housing bubble created excess demand based on poor lending standards. When the bubble popped, that excess demand disappeared. Not all the demand was fake in that cycle, however. In fact a good portion of it was real. It would be a drastic mistake to attempt to manipulate lending standards in an effort to recreate that extra fake demand. If historically low interest rates cannot generate home ownership demand, then we need to accept that a percentage of our adult population is simply not in a financial position to take on mortgage debt.

Obviously, lenders don’t want to accept this fact. Lenders and loanowners want to get out from under the bad bubble-era loans they made, and the only way they will do that is to reflate the old housing bubble, which they are.

• Demographics are not favorable in this cycle, but in time they will be. Household formation has been very soft. People are staying single or getting married older. This translates into lower housing ownership demand as most people will wait to marry before considering a home purchase. Fewer dual income households so fewer households that can afford a mortgage payment. These factors have driven strong demand in the rental market.

Still think tight lending is preventing a housing recovery? A quick review of the requirements for some of mortgage loans available may surprise you.

No money for a down payment? Is zero down too tight?

VA (Veterans Administration) loans require no down payment, a minimum FICO score of 620 and allow up to 60% debt to income ratio. I don’t think anyone could call this tight.

Poor credit score? Is a FICO score of 560 too high? FHA (Federal Housing Authority) loans require a FICO score of 560 to 620. (Scores of 650 are considered “fair and below 600 are considered poor or high risk). Other requirements include at least 3.5% down, and a maximum debt to income ratio of 43%. In some cases they will accept up to 50% debt to income ratio.

High debt to income ratio? Is 50% debt to income ratio too stringent? GSE (Government Sponsored Enterprise) loans allow for 43% to up to 50% debt to income ratio in geographical areas where housing is particularly expensive. A minimum FICO score of 620 and a 3 % down payment is also required. …

If lending standards really are that loose, why aren’t lenders underwriting more loans?

Perhaps the borrower pool is weak as Logan contends….

All housing analysts, I would surmise, would like to see a more robust housing market. Where we disagree is what should be done to encourage a healthy market. I believe we have a moral obligation as a society to reject attempts to engineer conditions that encourage people to put themselves in economic peril. We did that before, it was a disaster and we must learn from our past mistakes.

I have to believe that those who are saying lending is too tight are either not aware of the actual requirements and have absolutely no lending experience or have some other agenda that is preventing them from acknowledging the obvious. Gotta wonder. Frankly, I also gotta wonder why we keep listening to them.

Long ago political lobbyists learned they could control public perception by dominating the conversation, so they bombard a compliant financial media with self-serving stories and commentary. realtors want to frame the issue as one of tight lending standards because they believe looser lending standards will make them more money. realtors lack the self-reflection or understanding of how loosening lending standards ultimately leads to bubbles and a radical decline in their incomes; therefore, they lobby for short-term goals despite the long-term detriment.

42 responses to “Mortgage lending standards should not be relaxed further”

Lending standards could still go down some more since there are assets that are more risky than subprime mortgage at this point like some high priced stocks or bad sovereign bonds and also the rich need to put their excess money somewhere to earn interests. I don’t believe that we will get to the madness of the last bubble though. Many would be buyers knows this and they’re are not biting even when the standards got relaxed some more. Problem is rising rent is squeezing the middle class pretty hard since the landlord knows renter has little choice. This market is primarily buoyed by low rates and rising rent plus some investment capital. Rising rents eventually could be one of the forces for the next down turn when people has less disposable income to spend which affect many companies’ bottom line. But in many cases, people chose to lower their living standards so they could spend the same so this [rising rent] can go on a while longer.

One of the big features of Dodd-Frank was the ability-to-repay rules that mandate lenders consider whether or not the borrower actually can repay the loan. During the last bubble, lenders underwrote any loan some investor was stupid enough to buy. This time around, some of the most ridiculous loans won’t be made even if some stupid investor is willing to buy them.

As Mellow Rouse has shared, you can make non-QM loans, and investors are exploring this space. How far below QM standards they’re willing to go, and able to accurately price, is the question. Very steep damages are available if ATR is violated.

I’m not convinced that Dodd-Frank will ragout have teeth in practice. After all, banks are still getting the two dollar fine for their drug money laundering and other chicanery, and their CFOs are still getting away with “the dog ate my financial statements”. Is all highly dependent on enforcement and prosecutorial practicality at the SEC, DOJ, and US DAs office.

Ah, but it isn’t dependent upon any governmental body to enforce it. ATR is under TILA, which includes a private right of action. Guaranteed, every defense to foreclosure going forward will feature prominently a claim that the creditor violated ATR. If the loan isn’t a QM, the burden is on the creditor to prove they considered and verified the borrowers’s ability to repay the loan. The creditor must prove the borrower had the ability to repay. The simple fact that they made a non-QM loan is highly siggestive that the borrower did not have the ability to repay.

An obscure metric is sending a big warning signal about the global economy

First was the Baltic Dry Index, which tracks rates for transporting the major raw materials in bulk by sea. Reflecting the totally battered global commodities market, it crashed to an all-time low in February, though it has since edged up a tiny bit.

Now, containerized shipping rates are taking a majestic drubbing, and those from China to Europe have collapsed to all-time lows.

The Shanghai Containerized Freight Index (SCFI) that tracks shipping rates from Shanghai to Northern European ports plunged 14% from last week to $399 per twenty-foot container equivalent unit (TEU), down a vertigo-inducing 67% from the glory days just a year ago. It was the 11th week in a row of declines, and it set a new all-time low.

The index is now half of the key rate of $800 per TEU that a report by Drewry Maritime Research, released on April 19, considers the break-even rate for these routes even at the currently lower fuel costs. This leaves carriers deeply in the red.

The Asia-Mediterranean routes have experienced a similar collapse in shipping rates. The SCFI for these routes plunged 11% from a week ago to $540 per TEU, down 60% year over year, also setting a new all-time low.

The link between the global economy, external trade, and the shipping industry is clearly felt in the freight market, explained Peter Sand, chief shipping analyst at the Baltic and International Maritime Council (BIMCO), the world’s largest international shipping association.

He blamed an oversupply of ships, including “the continued inflow of new ultra-large container ships on the Far East to Europe trades,” and the deteriorating exports from China so far this year.

Gold will have its day,its just not now.When gold goes below a grand and everyone throws in the towel and the euro and yen fall,it will be golds turn.Stocks,gold,real estate all have a place in a investment portfolio.It just seems with real estate and gold you get these kool aid drinking frauds that want everyone to think that their values never really go down.Everything goes up and down,never marry a position,follow the trend and make a buck or two.

Officially Introduces Expanded Bill to Fight ‘Zombie’ Foreclosures

New York Attorney General Eric Schneiderman has introduced an expanded version of the Abandoned Property Neighborhood Relief Act which he introduced last year in order to cut down on the number of “zombie properties” – vacant homes not maintained during the long foreclosure process – in the state.

The modified bill is intended to expedite the foreclosure process on vacant properties and direct money collected for noncompliance of the law into a fund used to enforce the law, according to Schneiderman’s announcement.

“New York will never be able to fully recover from the devastation of the financial crisis until we seriously reckon with the crisis of zombies,” Schneiderman said. “The Abandoned Property Neighborhood Relief Act, which enjoys the support of local elected officials, law enforcement, and fair housing advocates all across New York, will equip our local communities with the resources they need to halt the spread of abandoned and vacant homes. Albany can finally alleviate the burden that these blighted properties impose on our towns and cities by passing the Abandoned Property Neighborhood Relief Act during this legislative session.”

The expanded bill requires mortgagees to provide homeowners with early notice that they are legally entitled to remain in their homes until the foreclosure process is complete (until a court orders them to leave), since many homeowners are unaware that they do not have to leave the house immediately when the foreclosure process begins.

It was a Suspicious Activity Report from his bank for withdrawing more than $10k in cash that did him in, so your theory is plausible. Presumably, a prosecutor like Spitzer would have known that all financial institutions have to file SAR’s reports and he would have taken some the steps to obscure his activities. It does smell fishy. Either he was supremely arrogant or horribly clumsy if there wasn’t a conspiracy involved.

Perhaps our difference is semantic. When I read “framed” I imagine a person being incriminated for something they did not do. Elliot Spitzer clearly was enjoying his prostitute, so he wasn’t technically “framed” as much as he was called out for what he didn’t want to publicly acknowledge. Where it feels like a framing is that he wasn’t doing anything corrupt (although prostitution is technically illegal), and the people who wanted to get him were likely after him because of the problems he was causing on Wall Street.

China’s push to challenge U.S. dominance in global trade and finance may involve gold — a lot of gold.

While the metal is no longer used to back paper money, it remains a big chunk of central bank reserves in the U.S. and Europe. China became the world’s second-largest economy in 2010 and has stepped up efforts to make the yuan a viable competitor to the dollar. That’s led to speculation the government has stockpiled gold as part of a plan to diversify $3.7 trillion in foreign-exchange reserves.

The People’s Bank of China may have tripled holdings of bullion since it last updated them in April 2009, to 3,510 metric tons, says Bloomberg Intelligence, based on trade data, domestic output and China Gold Association figures. A stockpile that big would be second only to the 8,133.5 tons in the U.S.

“If you want to set yourself up as a reserve currency, you may want to have assets on your balance sheet other than other fiat currencies,” Bart Melek, head of commodity strategy at TD Securities, said by phone from Toronto. Gold is “certainly viewed as a viable store of value for an up-and-coming global power,” he said.

China may be preparing to update its disclosed holdings because policy makers are pressing to add the yuan to the International Monetary Fund’s currency basket, known as the Special Drawing Right, which includes the dollar, euro, yen and British pound. The tally may come before the IMF’s meetings on the SDR next month or in October, Nomura Holdings Inc. said in an April 8 report.

Gold played a central role in the international monetary system until the collapse of the Bretton Woods framework of fixed exchange rates in 1973, according to the IMF. While the role of bullion has diminished since then, the fund still holds 2,814 tons and most central banks have some on their balance sheets. Russia more than tripled its holdings since 2005.

Participation among retail traders is classic sign of a top

Individual investors in the stock market are often referred to as “retail.”

This is because they trade in discount online brokerages like E*Trade’s and Fidelity’s, which is sort of like buying off the rack instead of the tailored suits and couture offered at the brokerages run by the Goldman Sachs or Morgan Stanleys of the world.

Consequently, retail as a group is not necessarily viewed on Wall Street as, um, the best dressed. However, their trades amid a market plunge of nebulous causes on Friday make them appear downright dapper today, presuming this rebound in equities holds. As ConvergEx Group strategist Nicholas Colas noted this morning, a compilation of orders from Fidelity’s customers showed they stormed the market looking for bargains like a bunch of doorbusters at Wal-Mart on Black Friday.

“Friday’s volatile action should have been exactly the kind of churn that spooks retail investors,” he wrote. “And yet, the data is clear: retail bought this dip.”

The end is near

1. I’m grateful that our choice of president has been reduced to two equally detestable dynasties or their proxies. This greatly simplifies the process of selecting a warmongering figurehead for the Empire and its bankers.

2. I’m grateful that I can watch a full spectrum of entertainment, ranging from depraved to dreadfully unfunny on any device at anytime. This white noise helps block out any troubling clarity of thought or urge to ask what I might feel if I wasn’t constantly distracted.

3. I’m grateful that there are so many opportunities to borrow money, because if I couldn’t borrow more, I might miss an astounding opportunity to consume more of something I don’t really need.

4. I’m grateful that every food item in the store now contains sugar in one form or another, or a sugar substitute. This simplifies the process of maintaining my addiction to sugar, as all I need to do is eat anything produced by Corporate America’s food sector.

5. I’m grateful I live in a country where the government can trample on the rights of its citizens behind a thin veil of legitimacy. After all, what terrible thing might happen if the government couldn’t arrest those horrible people tearing up their front yard lawn to plant a vegetable garden?

6. I’m grateful for our national obsession with fostering phony self-esteem that has no basis in accomplishment, dedication or sacrifice for others, as the self-absorbed, entitled populace will still feel good about themselves as the bloated, dysfunctional status quo implodes.

7. I’m grateful that we have institutionalized moral hazard as the unspoken law of the land, so financiers can gamble billions of dollars without worrying about the potential losses, as they know the taxpayers will foot the bill while they get to keep any gains.

8. I’m grateful our financial markets are now dominated by Federal Reserve manipulation, high frequency trading and dark pool shadow banking. This guarantees that all we commoners need to do to make a lot of money playing the stock market is to buy the dips.

9. I’m grateful that money can buy political influence so transparently, as this informal auction is open to anyone with tens of millions of dollars who wants to protect and expand their wealth and power.

10. I’m grateful that our mainstream media is owned by a handful of corporations, as the homogenized message they broadcast is reassuringly uniform. If every outlet is repeating that unemployment and inflation are low and the rising stock market is making us all wealthier, it must be true.

RT: During a congressional hearing [on April 15, officially titled ‘Confronting Russia’s Weaponization of Information’], House Foreign Affairs Committee chair Ed Royce said, “The Russian media is now dividing societies abroad and, in fact, weaponizing information.” Where is that coming from? Is it a genuine fear or fear of alternative opinions?

Noam Chomsky: He’s talking about the Russian media but if there were any imaginable possibility of honesty, he could be talking about the American media, for which that is correct. Take the New York Times — the greatest newspaper in the world. Take one example, at the first article that appeared today, that the tentative [nuclear] agreement with Iran was reached. It’s a thinkpiece, by Peter Baker, one of their main analysts. He discusses in it the main reasons to distrust Iran, the crimes of Iran. It’s very interesting to look at. The most interesting one is the charge that Iran is destabilizing the Middle East because it’s supporting militias which have killed American soldiers in Iraq. That’s kind of as if, in 1943, the Nazi press had criticized England because it was destabilizing Europe for supporting partisans who were killing German soldiers. In other words, the assumption is, when the United States invades, it kills a couple hundred thousand people, destroys the country, elicits sectarian conflicts that are now tearing Iraq and the region apart, that’s stabilization. If someone resists that tact, that’s destabilization.

That’s characteristic. The Summit of the Americas is meeting now in Panama. Take a look at the commentary on it here [in the US]. The big question is how much credit Obama will get for his move towards helping Cuba escape from its isolation in the hemisphere. It’s exactly the opposite. The United States is isolated in the hemisphere. You look back at the last hemisphere meeting in Colombia, a US ally. The United States was totally isolated. There were two big issues. One was admitting Cuba into the hemisphere. Everyone wanted it. The US refused, along with Canada. The other was the drug war, which the US insists on, and the Latin American countries who are being seriously harmed by it, they want it significantly modified, decriminalized and so on. And, again, the US was totally isolated. Those were the two main issues.

As for the steps towards Cuba, they’re described as noble gestures. The picture is that we’ve — exactly as Obama said — we’ve tried for 50 years to bring freedom, justice, and democracy to Cuba, but our methods have failed, so we might try some other methods to achieve these noble goals. The facts are very clear. This is a free and open society, so we have access to internal documents at an extraordinary level. You can’t claim you don’t know. It’s not like a totalitarian state where there are no records. We know what happened. The Kennedy administration launched a very serious terrorist war against Cuba. It was one of the factors that led to the missile crisis. It was a war that was planned to lead to an invasion in October 1962, which Cuba and Russia presumably knew about. It’s now assumed by scholarship that that’s one of the reasons for the placement of the missiles. That war went on for years. No mention of it is permissible. The only thing you can mention is that there were some attempts to assassinate [Fidel] Castro. And those can be written off as ridiculous CIA shenanigans. But the terrorist war itself was very serious. That was a footnote to it.

The other, of course, was a crushing embargo. We also know the reasons, because they’re stated explicitly in the internal documents. Go back to the early ‘60s, as the State Department explained, the problem with Castro was his successful defiance of US policies that go back to the Monroe Doctrine — 1823. The Doctrine asserted that the United States has the right to control the hemisphere. They couldn’t implement it at the time, but that’s the Doctrine. And Cuba was successfully defying that Doctrine. Therefore, we have to carry out a terrorist war and crushing embargo that have nothing to do with bringing freedom and justice to the Cubans. And there is no noble gesture, just Obama’s recognition that the United States is practically being thrown out of the hemisphere because of its isolation on this topic.

But you can’t discuss that [in the US]. It’s all public information, nothing secret, all available in public documents, but undiscussable. Like the idea — and you can’t contemplate the idea — that when the US invades another country and the other resists, it’s not the resistors who are committing the crime, it’s the invaders. And we, of course, understand that very well when, say, Russia invaded Afghanistan. If somebody resisted it, we don’t say they’re criminals, they are destabilizing Afghanistan. Maybe Pravda said that, I doubt it. But here, it’s normal.

So if the House wants to study the weaponization of the media, they can look right at the front pages of the newspapers that they get every day.

RT: Our network has come repeatedly under attack, even from State secretary John Kerry. Recently, he said, “RT’s influence is growing,” while his very own deputy, Victoria Nuland, said that nobody watches RT in America, which is probably not true. Do you think this is about money? Because we know that the BBG — the Broadcasting Board of Governors — has a budget of $750 million as opposed to RT’s $250 million, which has never been a secret. Or is it something else?

NC: I think it’s something else. I don’t think they care about the money. The idea that there should be a network reaching people which does not repeat the US propaganda system is intolerable.

America’s economy has grown for nearly six years and with particular vigor over the last six months. By historical standards, we’re due for another recession.

When that downturn comes, it will mark the end of what has been, recent months notwithstanding, a weak recovery. Even though private employers have added nearly 3.6 million jobs since the beginning of last year, the number of American workers is still only roughly where it would have been by the end of 2008 had the financial system not cratered that dark September. Several numbers point up the shortfall: if employers had added jobs after this recession as fast as they did after the short recession that ended in 1991, we’d have nearly 128 million private jobs now, not about 119 million. Then, too, not all jobs are equal. A family with two breadwinners made slightly less money in 2013 than in 2003, inflation-adjusted, census data tell us. A single-earner family fared much worse, taking in less than a family dependent on one worker made back in the mid-1970s. And many part-time workers want full-time jobs, as well as more predictable schedules.

Why has the recovery been so soft? It’s easy for Republicans to blame President Obama or for Democrats to blame President George W. Bush. But the truth is less partisan, and harder.

As three of the best recent accounts of the economic crisis explain, the recovery has disappointed because the economy was fragile long before it broke. For decades now, the United States, like the rest of the West, has depended on massive levels of consumer debt to mask weaknesses in jobs and income.

As American workers made less money competing with Asians and Eastern Europeans for jobs, they borrowed more, until the US economy owed trillions of dollars to the rest of the world. The economy crashed because its debt levels were unsustainable.

Blah, Blah, Blah… It all just seems like BS and excuses at some point.

The economy didn’t crash because debt levels were unsustainable. It crashed because economic growth became dependent on ever decreasing rates fueling debt expansion and the consumer purchases it enabled. People got lazy, entitled, and they remain so.

Once rates hit a floor investors would accept, new “products” had to be created that either back-ended the payoff, defrauded the investor into believing that there was little risk (through AAA ratings, e.g.), or, eventually off-loaded the risk on taxpayers.

We are now in a catch-22 situation: the debt levels need to fall for spending to recover, and spending can’t recover until debt levels fall. Rates can’t increase until either the economy grows faster than debt grows, or debt carrying costs fall either through repayment, lower rates, or repudiation.

There is also the possibility of deflationary deleveraging. By decreasing the costs of goods and services more income can be shifted to debt repayment. I.e., the debt-slice of a stagnant income-pie grows larger as the rest of the costs grow smaller. Lower energy costs are already doing this by effectively increasing real income. As commodity prices fall back inline with non-debt-fueled economic output from debt-fueled levels, real incomes will rise (at the detriment of commodity speculators, at least the ones who are long).

Healthcare costs are also out of control, and have been for sometime. As more effective treatments are marketed, R&D costs and activity will fall, and the cost of these treatments will fall over time. Like the industrial revolution, the nascent “medical revolution” fronts all the capital investment and will only pay off as treatment efficacy and efficiency is optimized.

Higher productivity can also achieve the same effect. By producing 1.5 hrs of product for 1.0 hrs of labor, prices could fall and wages could rise. This is the synergistic effect of technology on rising wages and falling costs. But, in order for this to happen, people need to work harder AND smarter.

Economies can grow when debt is expanding or when it is contracting. Sustainable growth happens when real advances in technology and productivity are realized. Real advances happen more often when there is something driving the change.

When debt is expanding and rates are falling, there is little need to improve methods and processes to achieve higher levels of efficiency. As the economy contracts, efficiency matters again. The most efficient companies survive and take market share. Once the economy turns up again, that is when the efficiencies start to pay back the investment.

The secret to success is that there is no secret. There is no oligarchy holding you back, only yourself. If everyone on the planet would do one thing better or more efficiently every day, then the economy would grow at an unprecedented rate. We, as individuals, have the power to improve our own lives and society. We only have to try, and to get out of our own way.

Its not all that complicated. Work hard. Work smart. “A borrower nor a beggar be.” Everything else will fall into place.

We are now in a catch-22 situation: the debt levels need to fall for spending to recover, and spending can’t recover until debt levels fall. Rates can’t increase until either the economy grows faster than debt grows, or debt carrying costs fall either through repayment, lower rates, or repudiation.

In our modern era of can-kicking debt, this catch-22 becomes a dangerous trap that weighs on the economy. In the past, banks were forced to foreclose on bad loans, reclaim any encumbered assets and resell the asset to regain whatever capital they could. This released the debtor from a debt they couldn’t repay, it unencumbered an asset that could be put to better use, and it replenished capital, which provided liquidity to lending. It was a way out of the catch-22 you describe, and now regulators no longer force this cleansing to happen.

There is also the possibility of deflationary deleveraging. By decreasing the costs of goods and services more income can be shifted to debt repayment.

The whole purpose of central bank monetary policy seems to be oriented toward preventing this from happening.

This is because the FED is as confused about cost-pull and supply-push deflation as they are about cost-push and demand-pull inflation.

In the case of deflation, costs can pull prices downward or supply can push prices downward. In the case of inflation, costs can push prices upward or demand can pull it upward. One situation is recessionary the other is expansionary.

For price DEFLATION:
If costs pull prices downward then demand will rise and supply will rise. If there is too much supply to meet lagging demand, then prices will fall until demand starts to rise. Supply falls to meet demand.

For price INFLATION:
If demand pulls prices upward then supply will rise to meet the demand. If rising costs push prices ahead of demand then demand will fall and supply will shrink to meet falling demand.

“In the past, banks were forced to foreclose on bad loans, reclaim any encumbered assets and resell the asset to regain whatever capital they could. This released the debtor from a debt they couldn’t repay, it unencumbered an asset that could be put to better use, and it replenished capital, which provided liquidity to lending.”

I don’t think the regulators have to force the banks to foreclose. The banks economic interests benefit by foreclosing. What the regulators did was create an environment where banks were encouraged to forego foreclosure. By changing the accounting rules from mark-to-market to mark-to-model, and yet enforcing solvency rules, banks had no choice but to slow down foreclosures.

The regulators could just as easily removed the solvency requirement and allowed banks to foreclose at will. All the non-performing assets could have been returned to performing status and bank profits would have risen much more quickly. But this was politically inexpedient; and banks were just as happy to take the political cover that allowed them to constrain supply and rapidly recover the capital through price increases. Through the penumbra of government action they were able to do individually what they couldn’t do collectively – constrain supply to drive prices higher.

You’re probably right. It’s largely a matter of degree. Last time, mortgage lending standards in particular were nearly eliminated. This time, it probably won’t go to such extremes, but I don’t doubt lenders will feel a false sense of security and underwrite bad loans that trigger the next credit crunch. It’s only a matter of time.

We are now living in the sobering reality of a country that was cut off its debt addiction.

It takes a long time to re-build an economy where demand is based on actual wealth and not rising equity induced wealth effect.

What the FED and the government want is for the wealth effect to return to boost our economy. This is why lending standards may be relaxed. They know well it is unsustainable in the long run, but if the economy starts to loose whatever little steam it has, they will do anything in their power to get the wealth effect.

Couldn’t agree more. What the FED fails to realize is that the foundation for the good times is built during the bad times. Failing to evolve as the circumstances warrant is to guarantee future obsolescence and economic calamity. Too big to fail, or too stubborn to learn from your own mistakes?

The game is not ending any time soon… And this is during a trough in credit availability… As soon as credit loosens up and demand for loans increase with inflation and higher interest rates.. That’s when the real fun will begin… Until it crashes 3-5 years later, with lower rates once again

Mortgage credit is not going to loosen to the degree you’re suggesting. It can’t. It’s against federal law. You will never again see loans made to people with no ducmentiation of their income/assets. You will never again see loans made qualifying the borrower on a fake teaser/IO/neg-am payment. The risk and consequences of a default are just too much.

QRM will be effective soon too, requiring risk retention. So, a big hedge fund can’t make bad non-QM loans, securitize, and sell them off to unsuspecting investors without retaining some risk.

But that’s the beauty of ATR. Creditors are required to use the borrower’s real income and required to use the real payment to qualify the borrower. So, if a creditor makes a loan at 1% interest for the first few years, adjusting to an index + 3 point margin later, the borrower must be qualified to make that fully-adjusted rate payment applicable in the future using the value of the current index. These shenanigans violate federal law.

I think we’ll see more non-QM loans made, but this wiill be nothing like the bubble run-up. ATR’s Appendix Q is very specific about what and how income/assets may be considered to qualify the borrower’s ability to repay. Many think it’s too strict. e.g. You could have huge assets and net worth, but a low income relative to the mortgage you’re seeking, and ATR rules won’t allow the creditor to make the loan.

I can foresee lenders taking more risk around self-employed and high asset borrowers. They just have to account for the default risk. They’ll do this by charging more to make these loans ad/or requiring very low LTVs that ensure the borrower will never default.

Whenever I start to worry about lenders and investors losing their minds again, I read your detailed posts on what the law actually says and does, and I feel peace about the protections in place — assuming Republicans don’t find a way to gut Dodd-Frank.